The summer of 2016 was marked by continuing reports of Puerto Rico’s crippling financial and public health crises. The island has a 68% debt-to-GDP ratio with $70 billion in outstanding debt. Additionally, the US Surgeon General declared a state of emergency, predicting that up to 10,000 Puerto Rican women will be infected with the Zika virus by the end of this year.
The Legislative Assembly now needs to find a way to combat their financial ruin while also providing the necessary services to halt Zika’s progression. Following intense congressional debate, President Barack Obama signed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) into law June 30. This legislation establishes an Oversight Board, a process for restructuring debt and expedited procedures for approving critical infrastructure projects. But how did the situation become so dire? How did events progress so quickly? And what does this mean for the autonomy and power of the Puerto Rican Legislative Assembly?
Creating the Opportunity for Crisis
Puerto Rico’s financial crisis is systemic and can be traced back to the signing of the Jones-Shafroth Act in 1917. This law not only granted all native born Puerto Ricans US Citizenship but it also granted all municipal bonds sold by the Puerto Rican government triple tax exemption status in order to incentivize investment in the new territory. The Tax Reform Act of 1976 provided further incentives by granting tax exemptions on income generated in the territories to US corporations, making Puerto Rico artificially attractive to investors. In 1996, President Bill Clinton signed legislation to phase out these tax incentives over a ten year period. As a result, the artificially attractive incentives were removed and Puerto Rico went into a deep recession. The island lost tens of thousands of jobs and suffered from mass emigration. In 2014, 84,000 people left the island, citing lack of employment opportunities as the main reason.
In the last decade, Puerto Rico has struggled with tremendously low government revenue compared to their increasing costs. Between 2003 and 2012, Puerto Rico more than doubled its gross public debt by selling municipal bonds to cover its deficits instead of making necessary spending cuts. In an effort to raise revenues, the Legislative Assembly attempted a comprehensive tax reform in April 2014 by introducing legislation that would reinstate some tax incentives while adding a Value-Added Tax (VAT) of 16%. The tax was supposed to take effect June 30, 2016; however, Puerto Rico legislators approved the elimination of the VAT transition in May with immediate effect. Since then, the problem has been exacerbated as the Puerto Rican government continues to issue tax exempt municipal bonds while they default on payments for existing debts.
In spring 2016, Puerto Rico defaulted on a $422 million debt payment. Congress began working on a comprehensive reform package that would help Puerto Rico restructure its debt. The result was the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), which is intended to institute permanent, pro-growth fiscal reforms. In order to best address the situation, PROMESA covers a variety of topics including executive authority within the territory, infrastructure issues on the island, miscellaneous economic provisions, and management of the territory’s debt.
The first substantive section of the measure establishes a Financial Oversight and Management Board (hereby referenced as the Oversight Board) comprised of seven presidentially appointed members with the Governor of Puerto Rico sitting as an ex-officio member. The Oversight Board will approve Puerto Rico’s budgets, pension plans, laws, financial plans, regulations, restructuring negotiations with creditors, and issuance of further bonds. All decisions regarding these issues will be made by a majority vote of the Oversight Board’s full voting membership in executive sessions that will be closed to the public. While no testimony will be allowed in executive sessions, the Executive Director may hold public hearings and receive testimony on designated issues at his or her discretion.
As a means of infrastructure revitalization, PROMESA establishes the new role of Revitalization Coordinator who will be appointed by the Governor of Puerto Rico. He or she will be responsible for reviewing any proposed, existing, or ongoing project and approving it based on priority. These priorities are determined by the impact that the project will have on an emergency, the availability of funds to implement or maintain the project, and the environmental/economic benefits provided by the project. The measure specifically calls out energy projects as the most critical.
In Title IV, Miscellaneous Provisions, PROMESA amends the Fair Labor Standards Act of 1938 Section 206 to allow for a four year reduction of the minimum wage to $4.25 an hour for laborers under the age of 25. Title IV also institutes an automatic stay on the commencement or continuation of all judicial or administrative proceedings against the Government of Puerto Rico, or to recover a liability claim, until February 15, 2017. Title IV also creates a Congressional Task Force on Economic Growth in Puerto Rico to propose potential growth measures.
Finally, PROMESA amends the definition of a debtor to include territories that have either requested the establishment of an Oversight Board or have had an Oversight Board established for it by the United States Congress. Now that the territory can legally be classified as a debtor, the measure then grants further responsibilities to the Oversight Board regarding upcoming debt proceedings. In this manner, the Oversight Board now has legal authority to represent the territory in future potential litigation with creditors.
The Future of the Puerto Rican Legislative Assembly
The most immediate concern for legislators is the island’s loss of autonomy for lawmaking and budgetary decisions. The Oversight Board will have approval power over the Governor’s fiscal plan and annual budgets while also reviewing laws, contracts, rules, regulations, or executive orders for compliance with the fiscal plan. The Oversight Board will have the power to consolidate government agencies, reduce the public sector workforce, and prevent the enacting of any law or action that may undercut Puerto Rico’s economic growth.
It is difficult to tell how PROMESA’s provisions will affect legislative priorities since the text of PROMESA makes no mention of the Zika public health crisis or funding for hospitals and schools. However, since the act has designated energy and infrastructure projects as critical, measures relating to these projects will likely be prioritized and expedited in the permitting process. It is possible that the Revitalization Coordinator will categorize measures regarding Zika as a priority, but this remains to be seen.
At this juncture, the next step is for Puerto Rican officials is to draw up their fiscal plan and submit it to the Oversight Board for review. This will likely be a difficult process as PROMESA has received little public support on the island. As Governor Alejandro Garcia Padilla will not be seeking re-election in November, the new Oversight Board is the most pressing topic in the current gubernatorial debate. Both the minority candidate Ricardo Rosselló Nevares (PNP) and majority party candidate David Bernier (PPD) opposed PROMESA during the legislative process. Bernier even threatened a lawsuit to block the measure before its passage. Whatever the election results may be, the Oversight Board is looking at a steep uphill battle towards a balanced budget and positive growth without the support of the incoming administration.